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Roy Smith-Is this it?

09/30/2011 @ 10:36am

This is the time during the marketing year when farmers start watching prices for the selling tool I call “The Dead Cat Bounce”. Key to the success of this tool for timing sales is the harvest low on the long term seasonal charts. To get a selling trigger it is necessary to have a rally off this important bench mark.  Even before the government report was released I had a call from an individual wondering if the rally on Thursday was the beginning of the bounce. 

My response to his question is that there is no way to tell if a particular event is the harvest low until after it happens. I track my local cash price and the price of March futures when watching for the harvest low and subsequent bounce. To qualify under my definition of a typical bounce prices have to move higher for ten trading days after a major low. One or two days do not qualify no matter how strong the rally is. The minimum amount of price improvement is 50 cents. With relatively high prices in recent years the rally potential is a dollar or more. 

One way to time the harvest low is by the calendar. While it seldom comes exactly on the third trading day of October, it is amazing how often it is very close to that date. Going back 20 years or more there have been times when it has been in November. However, in the last ten years from 2001 through 2010 the earliest it has been was October 2 and the latest it has been was October 22. The odds of a major low in the soybean market being in the first three weeks of October are very good.  

The response to today’s report probably means that the negative news will be bid into prices before the end of this month. Whether it comes sooner or later will depend a lot on the psychology of the other markets. For a while this week it seemed that there was some optimism in the equity markets. Whether today’s action is a minor correction or a resumption of the down trend will have a big effect on what the grain markets do. 

With cash prices down $1.60 for corn and $2.50 for soybeans in the last month, an over sold bounce would normally be expected. However, economic conditions currently in place around the world are not normal so farmers should not expect grain markets to act normally either. On my trip to Grand Island this week I bought gasoline for $3.27. That is the cheapest in recent memory. Energy prices reflect general economic conditions, including demand for grains. 

In my research on the dates for the harvest low I found that since 2001 the lowest cash price for soybeans was $3.73 in 2001. Last year the harvest low here in Eastern Nebraska was $9.66. That is $1.64 below Thursday’s close. Based on historical experience I expect a dead cat bounce this year. I expect it to come some time in October.  In terms of price expectations the turn could come at a level lower than today’s price. Even with prices far below last month’s bids, there is still downside risk. This is time to watch markets very closely and to not be greedy.   

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